IRA & long-term savings vs. Paying all CC debt?

emnah94 · #1 (**permalink**) 02-09-2006, 11:19 AM

I am 28 years old and the past year I have been in debt reduction mode. That said, I've been pretty much foregoing any savings in order to pay debt. At the end of this month, FINALLY, my only debt will be $4630 of CC debt at 9.9% and $12,500 in student loans at 5%. My emergency savings is tiny at $900, but continuing to grow (will have $1500 at end of next month). I contribute a measly amount to my 401k (2%) since there is no employer match, and feel guilty about not having opened a Roth IRA by now or have any long-term savings. Should I focus on paying off all remaining CC debt (I'm not worried about my student loan since its at a relatively low % and it'll be there for a while) or put some of that into an IRA and long-term savings (HSBC @ 4.8% comes to mind)? It would be nice to know that something else is growing outside of my small 401k contributions and my emergency fund, if that's the best thing. I want to be able to buy a home in my early 30s and just generally be financially healthy.

Ima saver · #2 (**permalink**) 02-09-2006, 11:24 AM

You first need is to build 3-6 months of living expenses in an emergency fund. I don't know how much that is cause I don't know what you make.

sweeps · #3 (**permalink**) 02-09-2006, 11:41 AM

First, about the 401(k). I know the Roth IRA is in fashion right now, but people underestimate the benefits of getting an "above-the-line" tax deduction right off the bat. Not only does it lower your federal and state taxes during your working years, but it also makes you eligible for more tax breaks because it helps you stay below credit/deduction phaseout ranges. Another common thing you will hear is that you get your choice of a wide range of investments with the Roth as opposed to a 401(k). True, EXCEPT for funds that are closed to new investors. I'm able to contribute to a couple of excellent funds that I wouldn't be able to if I went through my Roth.

Ok, enough ranting. You don't specify how much free income you have to spend, but as a general rule, I would split it between paying off the rest of the credit card, building up your emergency fund to 4 or 5 months of expenses, and in increasing your 401(k) contribution. Once the CC is paid off, divert that to saving for a house.

emnah94 · #4 (**permalink**) 02-09-2006, 11:49 AM

After deducting my expenses, including $500 toward my emergency fund, I have about $1700 free income to distribute...

I'd always heard to only contribute to your 401k up to what is matched my your employer...in my case, I am not matched. Is it best to still increase my contribution or put it in an IRA?

Ima saver · #5 (**permalink**) 02-09-2006, 12:02 PM

Wow, if you have $1700 free income each month, I would go ahead and pay off that cc debt in just 3 months. continue to put $500 in your emergency fund each month, up your 401 percentage and open a roth IRA. You will be in great shape!!

sweeps · #6 (**permalink**) 02-09-2006, 12:11 PM

Quote:

Originally Posted by emnah94

After deducting my expenses, including $500 toward my emergency fund, I have about $1700 free income to distribute...

Quote:

Originally Posted by emnah94

I'd always heard to only contribute to your 401k up to what is matched my your employer...in my case, I am not matched. Is it best to still increase my contribution or put it in an IRA?

If you have $1700/month to spend, then sure, open a Roth. You'll hit the max in no time. Then bump up your 401(k) contribution to what you can afford.

Just to clarify, I'm not at all anti-Roth. I just cringe when I hear the advice that Roth's always beat 401(k)'s. Contributing to a 401(k) is better in some situations -- even without a match.

flash · #7 (**permalink**) 02-10-2006, 12:55 PM

Quote:

Originally Posted by emnah94

FINALLY, my only debt will be $4630 of CC debt at 9.9% and $12,500 in student loans at 5%. My emergency savings is tiny at $900, but continuing to grow (will have $1500 at end of next month). I contribute a measly amount to my 401k (2%) since there is no employer match

I want to be able to buy a home in my early 30s and just generally be financially healthy.

First, "Finally" concerns me. How high have they been, and are you sure you won't rack it up again? You OWE $17K. Even at 5%, that has to be a priority.

You ARE contributing to your retirement, and you have time to accumulate retirement. There is no matching fund to be lost, and you are probably in a low tax bracket where it won't make much difference at this point.

IMHO, if you are going to be financially healthy, you have to get the debt down.

Calculate how much you will LOSE paying interest as it accrues. How much total LOSS will you have. Balance that against any GAIN you may have by investing, etc.

cash4life · #8 (**permalink**) 02-11-2006, 09:49 PM

yeah, savings rates aren't going to help you here. throw some $ at that 9.9% !holy moly!
$458/month in interest there man. you gotta kill that beast before it eats you!

1st month assuming you start paying on it immediately.
4600 (-1700) -287.1 *at least 500 emerg. fund saves 100$ on interest and final payment would be 1000$ instead of 1634.
3187 (-1700) -147.2
1634 (-1700) +66
now think about all the $ you will be saving from NOT paying debts!

--the 5% loan may be able to be reduced, but that's already pretty low. Try splitting funds between that, your emergency fund, and your 401 once that Creature Card is dead.

Bluezy · #9 (**permalink**) 02-12-2006, 12:41 AM

You subtract $458 in interest from your $1700 per month in "free money". In reality you have only $1242 per month that is free.

Pay down all debt ASAP. You won't be financially healthy until you pay down that debt.
At 28 you won't be retiring soon, so contributing to any 401k's, Roths, IRA, etc. can be resumed once you are debt free. However, I would place some of the funds into your emergent account to avoid using those credit cards!

Ima saver · #10 (**permalink**) 02-12-2006, 06:14 AM

That is not $458 a month in interest charges, that is $458 per year, or about $38 a month, that is a big difference. But it is still money, and if I had $1700 per month extra, I would pay the credit card debt off in three months, then consentrate on building up my emergency fund and a roth ira.

cash4life · #11 (**permalink**) 02-12-2006, 06:43 PM

ah, yeah i overreacted. lol I'm too used to looking at monthly bills and what not. ne way good idea to get rid of it soon. At least take it down by half, then it won't be building up near as much, and he'll still have some money to burn.

TBH · #12 (**permalink**) 02-12-2006, 07:08 PM

Hey, it sounds like you are doing great. I agree that you should throw all available money at CC debt. When that's gone (and the cards are cut up or on ice or whatever you have to do to prevent it creeping up again), I like the idea others have expressed of dividing available money between student loan, 401k, and emergency fund. The emergency fund will also get you in great shape to buy a house. I know our E fund saved our butts when as first-time buyers we underestimated the repairs needed to our 70-yr-old house. And you should really have a solid 3-6 months' expenses readily available over and above whatever you're saving for a downpayment.

Altho it makes some financial sense to prioritize killing the student debt as soon as you finish paying off the CC, I think it will help keep you motivated to watch your E fund and 401k grow.

Yes, you have time to save for retirement, but don't wait to start. Inch the percentage up whenever you can, without neglecting other goals.

You're gonna be in great shape. I'm 29--nice to hear of somebody else kicking those Gen X stereotypes about all the spending and playing we're supposedly doing.

baselle · #13 (**permalink**) 02-12-2006, 08:11 PM

Sounds like you are making great progress, and I agree with everyone else ... this is not the time to slack off when you are sooo close. Pay off the debt. Then at least get 6 paychecks into an emergency fund.

But - you have the luxury of time to learn about your next steps to invest. While you are paying off the debt in these next couple of months, learn about what funds are in your 401K. Are they mutual funds, or company stock, or what? Take a peek in Morningstar.com and see whether you have decent allocation choices, how they have been performing, and what their fund fees are. Are they worth putting more than 2% in? If they are, I would definitely begin to bump them up 1-2% per quarter. If they are not and you think there are better choices out there, then its time for an IRA. When you are finished with an IRA (4000$/yr, 5000$/yr next year), then go back and bump your 401K into the best choices you've decided on based on what have.

So many people want to do things bass ackward.

Learn before you plan, plan before you implement.